Title Flashcards
First off, let me reiterate: a title is not a document, nor is it a piece of paper. It’s not something you can physically hold! (That would be the deed.) Instead, the term title refers to an abstract concept. It includes someone’s ownership rights to a specific piece of real property. So, if you hold the title to a property, you have ownership rights to the property.
Legal Title
Earlier in the course, you learned that title, or legal title, refers to the complete legal ownership of real property and the bundle of rights associated with it.
But there is another kind of title: equitable title.
Equitable Title
Equitable title is an ownership interest created by a financial investment in a property by either a lienholder or buyer. So while you as the property owner may hold legal title to the property, your lender is said to hold the equitable title.
Title Issues
The reason we are discussing title in this chapter, Anthony, is because an owner’s title might be in bad shape. 😕 The owner might have a laundry list of liens on the property, from unpaid taxes to an unpaid contractor. There might even be a dispute about who actually owns the property.
A seller might not even know about all the title issues that their property has. They might in good faith try to sell their property without disclosing any of the title issues.
If a buyer and lender were to just trust the seller that the property is free of encumbrances, they could be in for a rude awakening once that title transfers. Luckily, there are measures in place to prevent a situation like that. A typical real estate transaction will involve an extensive examination into the current state of a title.
The most basic question about a title is: is it marketable? What does that mean? Let’s talk about it.
Title
A marketable title is one that is:
Free from serious defect
Free from legal exposure
Reasonably thought to be marketable should the buyer become a seller at some point in the future
To sum it up, a marketable title is a title that is free from significant encumbrances or defects (such as liens) that might otherwise prevent a purchaser from enjoying or eventually selling the property.
Not Required
While it is expected that a seller has a marketable title to… well… market their property, it’s not a requirement. But it is preferred because a title containing defects can limit or restrict ownership, so a buyer really needs to know the status of the title before accepting the deed. Concerns arising after that point usually require a legal course of action to remedy.
Magnifying glass on blue wooden background.
Title Search
So how are we to know if a title is marketable? Do a title search! This is a job for a title company.
A title search is a thorough examination of available public records in the county to determine who has rights to the property and whether any defects exist in the chain of title (more on that in a second).
In a title search, the records of the conveyances of ownership are examined, beginning with the present-day owner and going back in time — potentially to its origin.
State statutes ultimately determine the minimum required length of search time to be covered but it falls between 40 and 60 years.
What a Title Search Includes
A title search includes the examination of many public records, including:
Wills
Judicial proceedings
Tax records
Special assessments
Recorded liens
Encumbrances that may affect title
As you can see, a title search can be a pretty exhaustive thing. And oftentimes these records are stored in a number of ways — by the name of the buyer, the name of owner, the street address, lot number, etc.
Marketable Title
Let’s talk about a few things that make a title marketable (or not so marketable) that will likely surface during a title search.
Chain of Title
A title search will help to identify the chain of title.
The chain of title is the entire chronological record of a property’s ownership… the genealogy of real estate, you might say.
A search of the grantor-grantee indexes can reveal a complete line of fee title owners, starting with the present-day owner and going backward to the original grant — linking each owner to the next in a recorded chain.
The process of combing through these records, trying to find any claims or interests against a property, is called adversing the title.
Scenario: Chain of Title
Angela Jeter owns a three-story red brick home out in the country. She sells her home in 1923 to Natalie Barbus, a woman who lives in the property until she dies in 1975. In her will, she designates Eden Stober, her granddaughter, as the beneficiary, so the property passes to Eden. Eden lives in the property for about 30 years until she decides to relocate to a more urban area. She sells to Asher Doob and uses a quitclaim deed in order to correct an error in the property title.
All of this information and history should be represented in the chain of title. Take a look at the image below to see what that chain of title might look like.
Chain of title from Angela Jeter to Natalie Barbus to Eden Stober to Asher Doob with dates and conveyance details.
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Marketability: Chain of Title
If there is a gap in the chain of title, the chain is said to be broken. A broken chain of title results in a cloud on the title. ⛈
To remove this cloud, an owner may need to initiate a suit to quiet title. This would serve as a kind of lawsuit against anyone who has a claim on the land. If the property owner wins the suit to quiet title, no further challenges to the title can be brought.
In short, a suit to quiet title clears the title record of any unrecorded claims.
Where Clouds Come From
One kind of cloud on a title that can surface while going through the chain of title is an unreleased deed of trust. Always be on the lookout for issues that could be problematic during title transfer, such as:
Fraud
Liens
Inheritance issues
Foreclosure proceedings
A woman standing next to home with the title clouds of fraud, liens, probate issues, and foreclosure proceedings hovering all around.
Scenario: Mary and Caitlan
Let’s say that Mary dies and her estate was not probated (the validity of the will was not established), but Mary’s niece Caitlan, who served as her in-home caretaker during her final years, takes the deed and assumes ownership of the property. If Caitlan later wishes to sell the property, she may need to locate others who should have been a part of the inheritance. Any other relatives may have to “sign off” on the property indicating that they did not expect anything from the deceased’s estate and then the sale can move forward. Caitlan’s agent will want to ask her the right questions to surface any potential clouds on the title, including possible inheritance disputes that may complicate the transaction. In this situation, it would be wise for Caitlan to consult an attorney before proceeding with the sale.
Fraud
An additional cloud on the title could be created by some type of fraud. For example, there are cases in which a land developer sells the same tract of property to more than one person. This issue can be resolved, but usually to only one person’s satisfaction.
Color of Title
A cloud on the title isn’t the only thing that could go wrong in a title transfer. There’s also the issue of color of title.
Color of title refers to a title transfer that is defective in a way that is unknown to the new owner. The title might appear valid, but it is actually hiding a defective title. A color of title situation could spell very serious problems for a new owner.
For example, another party that has claim to the title may be able to pursue adverse possession… and they may win.
Marketability: Cloud on the Title
When the attorney or title company performs a title search they analyze the chain of title, clouds, and other things that affect a title’s marketability. The result is an abstract of title. In general, abstract of title isn’t really used in Arizona (still, it’s good to know about!).
As opposed to a thorough and exhaustive chain of title, an abstract of title is an abbreviated history of a property. It includes info on any transfers, grants, wills, conveyances, liens, or encumbrances. It’s a report detailing what was discovered in the title search. The person responsible for preparing this report is called an abstractor.
The Abstractor
The abstractor searches the public record and summarizes the events that affected the title throughout its history, from the original grant (if possible) to the present day.
All recorded instruments, liens, and encumbrances are included — noting their current status — in chronological order. A bibliography is attached to the report to reflect the scope of the research done to create the report.
Take Note
It’s important to note that abstractors do not give opinions concerning the condition of the title. The abstractor is merely responsible for writing the abstract of title. After that, an attorney will look over the abstract of title and deliver their opinion of the title’s condition and marketability.
Abstract of Title
In order to prove title, as well as prevent all manner of title defects, there needs to be evidence of title. Official evidence of title is constructive or actual notice of real property ownership, such as:
An opinion of title
A certificate of title
A Torrens certificate
Title insurance
Let’s learn more about each of these wonderful evidences of title. First up: opinion of title.
Opinion of Title
A prospective borrower or buyer can use an opinion of title as evidence of title. This is the official opinion of an attorney regarding the condition of a property’s title. The opinion of title is created by searching title records.
Certificate of Title
After performing a title search, the attorney will prepare a certificate of title, which is a document detailing the chain of title and offering an opinion on the marketability of the seller’s title. Think of it as a written certificate of the attorney’s opinion of title.
The certificate of title is one method sometimes used to prove ownership but it is important to keep in mind that it does not always guarantee ownership.
Similar to an abstract of title, it certifies the title condition based on information present in public records. However, hidden defects may not be detected, and unrecorded liens will not turn up in a search of public records. A certificate does NOT offer defense against these unknown defects.
Ya never know when there’s a defect lurking around the corner, Anthony.
Torrens Certificate
The Torrens system is a recording system used in some states in which the state holds all records of land and title ownership, evidenced by a certificate of title. The Torrens system is not used in Arizona.
Basically, with the Torrens system, the deed is registered directly on the certificate of title itself. It is only after the deed is registered on the certificate of title that the title passes to the new owner. After that, a Torrens certificate is issued to the new owner.
If a state uses it, a Torrens certificate is the absolute BEST form of title evidence. Because in a Torrens system, the state maintains the register of land, a Torrens certificate is basically the supreme, unassailable evidence of ownership. Though it is the best evidence of title, the Torrens system always exists in tandem with other recording procedures. This is because each state and area uses the system differently. For example:
The Torrens system is widely used in Minneapolis but much less often in the rest of the state of Minnesota.
The whole state of Hawaii uses the Torrens system, but typically only for developers or owners of larger tracts of land.
In any state that uses the system, one house could be registered with the Torrens system, and the house next door might use a different registration.
Even if Arizona doesn’t use the Torrens system, it’s important to know about because it may still come up in your practice. And it may be on the exam!
Torrens History
The Torrens system was invented by Sir Robert Torrens (people love naming things after themselves, don’t they?) who was British but working in Australia during the 1800s. He noticed that British ships used for sailing were registered succinctly, in a way that was easy to use. There was an official ship registry that had the records for every ship: the records included the ship’s name, owner, debts associated with the ship, and everything in between.
So Sir Robert Torrens decided to rock the boat and take the ship system over to land title registration. And here we are, Anthony.
Torrens Prevents Adverse Possession
Real property registered in the Torrens system cannot be lost to adverse possession. That’s how powerful a Torrens certificate is!
If a Torrens certificate cannot be obtained for a property, then title insurance serves as the second-best evidence of title. There’s no shame in second place, title insurance! Enjoy that silver medal! 🥈
Evidence of Title
Title insurance, also known as a title policy or title insurance policy, is a policy that protects lenders from certain financial losses due to title issues, such as defects, encumbrances, and liens. It’s also possible for homebuyers to purchase a title insurance policy, but the required policy will be for the lender.
Instead of being recurring like other insurance policies, title insurance is non-recurring and paid for up-front in one lump sum.
Remember: Unless the Torrens system is used, a property that has a title insurance policy is often accepted as the best evidence of marketable title. In fact, title insurance is the go-to form of evidence of title in Arizona. Way to go, title insurance! 👍
What It Insures
In contrast to other types of insurance that protect against events that may happen in the future, a title policy insures against problems that occurred before the time of purchase but are discovered after closing.
Buying Title Insurance
Buyers may choose any title agent they want. They don’t have to use the company that the real estate agent or lender recommends.
As always, the buyer should not use an agent who is unlicensed. If title insurance is bought from an unlicensed company, any claims the buyer might have could go unpaid.
Title Commitment
Before issuing a title policy, a title company will perform an examination of public records. Based on this review, the company will decide whether to insure the title. Usually, a preliminary report or title commitment is issued. The title commitment states the terms and conditions on which the actual policy will be issued. The document includes:
The name of the insured party
Legal description of the property
The estate or interest covered
A schedule of expectations including any found encumbrances and defects and any known unrecorded defects
Any conditions or stipulations under which the policy is issued
Evidence of Title, Ranked
Here are the ways to prove title, in order of quality.
Chart ranking evidence of title by security: Torrens system 1st, title insurance 2nd, and opinion/certificate of title 3rd.
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Title Insurance
The American Land Title Association (ALTA) is a group of title companies across the U.S. that joined together to create some standardized forms for title commitments. This helps to ensure that across the country, homebuyers are getting the same thing when they purchase title insurance. Of course, every property’s title insurance coverage will be slightly different due to the quirks of the property and the area, but generally, a title commitment has four sections, called schedules.
Schedule A
Schedule A contains the details of the transaction: the name of the buyer, the legal description, the types of policies being purchased, the type of interest being purchased (like fee simple, for example), etc. Agents should review this section and make sure there aren’t any mistakes.
Schedule B
Schedule B includes the exceptions to the policy. There are standard exceptions, that all policies don’t cover, and then specific exceptions to the property in question.
Standard Exceptions
There are four standard exceptions to a title policy:
The rights of people currently in possession of the property (for example, the rights of a tenant with a valid lease)
Any encroachments, encumbrances, or boundary issues that an accurate survey would show
Easements that aren’t recorded in the public record
Mechanic’s liens or tax liens that aren’t shown in the public record
Specific Exceptions
Specific exceptions would be things like easements, liens, or deed restrictions that the buyer and title company know about. Obviously, these will be different for every property (and many won’t have any!).
Schedule C
Schedule C is known as the “requirements” section. It’s everything that the seller needs to clear up before the title company is willing to give the go ahead for closing. This could be things like mechanic’s liens or tax liens that need to be paid before the title is transferred.
Schedule D
Schedule D is mostly disclosures. It will disclose anyone who gets a share of the title premiums (for example, the underwriters).
Standard Title Commitment
Title companies issue several types of insurance policies. The two most common are:
Owner’s title insurance policy
Lender’s title insurance policy (sometimes called mortgagee’s title policy)
Owner’s Title Policy
An owner’s policy protects a new owner (the buyer) from claims against the property that existed before it was purchased but are discovered after closing. This type of policy remains effective for as long as the owner or their heirs own the property.
The policy covers the purchase price of the house and can be negotiated within the contract, meaning that the seller or buyer could cover the cost of the owner’s policy.
Lender’s Title Policy
A lender’s title policy will protect the lender from unknown existing defects on the title. Typically, this policy is part of the lender’s loan package (paid for by the buyer) and covers the balance of the mortgage. A lender’s title policy assures a lender that it has a valid first lien (or in some cases second lien) against the property.
Should a claim arise that voids the title, the policy will repay the mortgage, protecting the lender from loss. Reimbursement on a lender’s title policy is limited to the amount remaining on the loan balance, meaning that coverage decreases as the buyer’s loan is paid off.
Everyone’s gotta protect themselves, Anthony.
Title Insurance: Types of Policies
I bet you’re probably wondering, “Exactly what does a title policy cover?”
Good question! The particular defects that a title company insures against will depend on policy type and any endorsements that are requested by the lender. However, coverage can generally be broken down into two main categories: standard coverage and extended coverage.
Standard Coverage
A standard coverage owner’s policy usually insures against the following:
Forged documents
Incompetent grantors
Deeds not signed by a necessary party
Improperly recorded deed
Liens and encumbrances recorded but not disclosed
Incorrect legal descriptions
What DOESN’T a Title Policy Cover?
We already talked about the standard and specific exceptions to coverage that show up in Schedule B. But keep in mind that title insurance doesn’t insure against fire, flood, theft, or any other type of property damage or loss. That’s the job of a homeowner’s insurance policy (more on that in a moment).
So it’s probably best if you put the flamethrower away, Anthony, because a title policy won’t help you there.
Title Policy Coverage
If a lender requires it, a borrower will need to have extended coverage.
As the name suggests, extended coverage provides protections that extend beyond what is insured under a standard coverage policy.
Lenders often require that the lender’s policies have extended coverage. But owners have the option to extend the coverage on their owner’s policies as well.
An owner’s policy with extended coverage insures against items such as:
Certain unrecorded liens not known by the policyholder
Off-record easements or adverse possession claims
Not having access to the property
Discrepancies in the boundaries of the property, or certain kinds of encroachments
Defects discoverable through a property inspection and examination of survey
Extended Coverage
Hopefully, a homeowner never has to use their title insurance. Unfortunately, stuff happens in this life, and sometimes a title issue pops up after closing that requires insurance to deal with.
Subrogation
By the time a title insurance claim comes around, your job will already be done and your commission check collecting interest in your sensible high-interest savings account (or, ahem, spent on extremely necessary online shopping purchases).
However, you should understand the concept of subrogation anyway. Subrogation is the substitution of one person for another in a lawful claim. So in the case of title insurance, once the title insurer pays the homeowner to remedy the situation, subrogation gives the insurance company the right to get their money from whoever owes it to the homeowner.
Even though the homeowner is the one who was wronged by whatever the title issue is, because the insurance company paid the claim, they’re now the ones who can pursue a legal remedy.
So yeah, think twice if you’re going to commit title fraud, because you’ll likely have a scary insurance company coming for you. (Also because it’s wrong.)
Claims
You already know how important recording is. Let’s take a second to look at what recording means for titles.
Recording Acts
You may recall from an earlier chapter that recording is the process of placing documents into the public record per state law. Documents affecting any interest, right, or title to a parcel of real estate must be recorded as a public notice with the county recorder’s office.
Title Records
All of these recorded documents live in the title records, which are public records that catalog all real estate information in the county, including:
Owners’ names
Liens
Easements
Encumbrances
There are two reasons this is done:
Those wishing to discover existing interests in the property can know where and how to access that information
Priority of legal interests tend to be established by virtue of a first-in-time-first-in-line convention
Exceptions
Exceptions to this priority principle include property tax liens and special assessments.
Additionally, quitclaim deeds are not subject to the chronological priority view since they convey only the interest of the grantor at the time of conveyance — which may be no interest at all.
To Sum It Up
Property information is documented, saved, and recorded in the title records.
Recording provides public notice and helps protect both buyers and lienholders.
Recording
Giving notice of title is the duty of a real estate owner to make their claim or interest on a subject property publicly accessible.
Types of Notice
You might remember learning that notice breaks down into:
Constructive notice
Actual notice
We talked about these types of notices before, but they’re important to the concept of transferring title.
Constructive Notice
The concept of constructive notice presumes a diligent individual can search the public record to gain a sufficient understanding of the property, including those with present and past interests in that property.
Actual Notice
Actual notice is direct or first-hand knowledge. It can include:
Reading a deed
Searching title records
Physically visiting a property to see who currently has possession
If you show up to a house and spot a person in possession of a property, that can serve as actual notice that the property is currently in someone’s possession.
Constructive vs. Actual
Let’s compare and contrast.
Venn diagram listing similarities and differences between constructive notice and actual notice.
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Giving Notice
It helps to think of actual notice as knowledge that you have obtained firsthand, either as a result of your own experience or communication you have received with your own ears or eyeballs. 👂👀
Constructive notice, on the other hand, is more of a legal notice, accessible through public records. That’s why it’s sometimes referred to as legal notice (go figure). Let’s consider a couple of examples.
Scenario: Property Owner Josh
Property owner Josh records his deed, making it available through county records. Josh has just given constructive notice of title to the general public.
Potential buyer Audrey sees a “For Sale” sign on Josh’s lawn. She looks up public records to find out more information about the property. She has now seen, with her own eyes, the ownership information – meaning that she has received actual notice.
Alternatively, if Audrey didn’t want to go through all that trouble, she could have just visited the property to see if anyone was currently in possession. That’s also actual notice.
It’s on You Now
Once the property owner has fulfilled their obligation to give constructive notice through the public record, the onus shifts to the prospective buyer and their lender to do their due diligence and examine the public record and/or make a visual inspection in order to gather the information they need to commit to the purchase. Generally, this is done with the title search.
This is sometimes referred to as inquiry notice: information a curious person could discover by asking questions or inquiring.
EXAMPLE
You notice a service road cutting across the property you are about to close on. As far as you know, there are no easements, encumbrances, or the like, but this is probably something you should ask questions about – the law expects you to ask questions, in fact!
Constructive Notice vs. Actual Notice
